Will Strauss-Kahn help China surpass Japan?

Commentary: IMF turmoil could open door for Japan’s Asian rival

LisaTwaronite

TOKYO (MarketWatch) — Dominique Strauss-Kahn’s last visit to Tokyo to meet with Japanese financial officials didn’t go as planned: His plane touched down in a drastically changed country.

“I arrived in Japan on a scheduled visit shortly after the earthquake happened, and I am profoundly saddened by the loss of life that has occurred,” the managing director of the International Monetary Fund said in a statement in Tokyo on March 11 — the day the quake and tsunami left 24,000 people dead or missing.

As the IMF and international financial community continue to assess the global impact of Japan’s disaster, Tokyo is now weighing the impact of Strauss-Kahn’s own surprising headlines this week — and whether both developments could end up helping China, Japan’s chief Asian rival.

Japanese Finance Minister Yoshihiko Noda told reporters Tuesday that “frankly speaking, I was surprised” by the weekend arrest of Strauss-Kahn, who is being held without bail after being charged with sexually assaulting a maid at a Manhattan hotel.

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While some economists foresee business continuing as usual — if $1 trillion in European bailout packages can be called “usual” — others say the IMF leadership shake-up could open the door to greater leadership for more up-and-coming emerging-market countries.

While both are global institutions, the IMF and World Bank are still steeped in Western influence. The head of the former is traditionally a European, while the latter has always had an American chief.

China is among the countries that have long called for an overhaul of the IMF’s voting system, so that influence reflects changes in economic status.

“One possible outcome of the [IMF] turmoil could be to accelerate the bid by EM countries for more influence and a high-profile position at the fund,” said strategists at Brown Brothers Harriman.

The U.S. is still largest donor to the IMF, but China became the third-largest IMF member country when the latest realignment was announced in March. Three other EMs — Brazil, India, and Russia — are now among the fund’s 10 largest shareholders. See IMF website for more on quotas.

Last year, China officially became the world’s second-largest economy after the U.S., and Japan dropped to No. 3.

And then the disaster struck. Last month, IMF economists cut their growth predictions for Japan in 2011 to 1.4% from 1.6% due to the impact, and warned of significant downside risks to its outlook.

The earthquake also reminded the world that Japan still occupies a prominent niche in the global supply chain — one that some companies are likely rethinking, after all of the disaster-triggered losses and disruptions. Japan’s pain could be China’s long-term gain, if multinational companies decide to move their manufacturing operations there.

Both the Strauss-Kahn news and the earthquake were surprising, but neither came completely out of the blue. While the IMF head is innocent until proven guilty in the U.S. legal system, the charges against him come against the backdrop of his reputation for womanizing, as well as his admission of an affair with an IMF subordinate. And Japan’s frequent seismic gyrations are notorious.

Japan has had its own share of sex scandals. Politicians’ discreet marital infidelity rarely raises eyebrows here, but a culture that values self-discipline and control for the good of the group generally frowns on any reckless behavior that could threaten social stability.

As in nearly all human societies, scandals have sometimes led to the downfall of powerful Japanese men. Most notably in modern times, Sosuke Uno resigned as prime minister in August 1989 after serving for only three months, after revelations of an embarrassing — though apparently mutually consensual — relationship with a geisha.

If nothing else, the Strauss-Kahn developments are yet another reminder to Japan that anything can happen, and that it had better keep a close eye on its Asian neighbor.

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